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Call it recycling opportunity. After their failed bid to host the 2004 Summer Olympics, Stockholm city leaders decided to turn a would-be sports village in the Hammarby Sjostad district into one of the world's most successful eco-villages. The practices of powering buses with biogas, recycling rainwater for irrigation and using organic waste for fertilizer spread to other districts of Sweden's largest city. Today the city's water is so clean that fishermen actually stand on bridges in the central business district, catching fresh salmon and trout.

Stockholm was named the first European Green Capital in 2010. Since then, green innovation has become a pillar of Swedish national competitiveness. With its target to become a fossil-fuel-free city by 2050, Stockholm hopes to turn green into gold by exporting smart power to an energy-conscious world.

Construction has just begun at the new Royal Seaport, where a smart grid will allow renewable energy (including solar and wind power) to flow among the homes and offices of residents. Buildings will become "green houses" that not only use but also store green energy and then feed it back into the grid whenever possible. This should enable yearly carbon emissions to be reduced to less than 1.5 tons per person by 2020 — well below the U.S. average of 20 tons. Ships will be able to plug in and charge up using the onshore electric grid, meaning they can shut off noisy engines, making the harbor area more attractive to live in.

Delegations from nearby Copenhagen and Helsinki and places as far-flung as China have become regulars in Stockholm, taking notes on how the city government is building out its grid through public-private partnerships involving Finnish utilities and Swiss engineering titan ABB.

The next step is to export Stockholm's smart energy to the world. Denmark, for example, is connected by underwater cables. There's talk of using such physical connections to enable development of a pan-European energy grid that would theoretically allow all of Scandinavia to export wind and hydropower southward. Swedish historian Gunnar Wetterberg made waves when he called for the five Scandinavian countries to form a United Nordic Federation in the next 20 years. There'd be plenty of votes for Stockholm as its capital.

Ayesha and Parag Khanna are directors of the Hybrid Reality Institute, a think tank that explores the implications of emerging technologies.

Parag Khanna

Parag Khanna is a leading global strategist, world traveler, and best-selling author. He is a Senior Research Fellow in the Centre on Asia and Globalisation at the Lee Kuan Yew School of Public Policy at the National University of Singapore, and Managing Partner of Hybrid Reality, a boutique geostrategic advisory firm. Read more.